June 21, 2018 - The Supreme Court of the United States has announced its
ruling in the case of South Dakota v. Wayfair. In the case heard by the
court, the State of South Dakota defended its law requiring online retailers
with more than $100,000 in sales or more than 200 transactions per year to
collect and remit sales taxes on purchases delivered to customers in
South Dakota.

The court ruled in favor of the State of South Dakota, which by itself only
affects Wayfair and its co-defendants Overstock and NewEgg, but by extension
could reshape the five-hundred billion dollar online retail market across the
entire United States. Why? Because the ruling overturns the previous
precedent set by the 1992 case of Quill v. North Dakota, which established
that the State of North Dakota could not compell an out-of-state mail order
retailer to comply with North Dakota sales tax laws when fulfilling orders in
North Dakota.

In Quill v. ND, the court determined that the Commerce Clause, which prevents
states from enacting laws that restrict the free flow of commerce between the
states, applied to Quill, an office supply company in Maryland, a state that
itself does not charge a sales tax. The court decided that they could not
be compelled to collect and remit sales tax on orders placed by and delivered
to customers in any other state except where they were legally registered.
That case and the precedent it set remained relatively untouched until the
internet began to reshape the U.S. retail market with companies like Amazon
and Ebay, which opened their online marketplaces in 1995.

As sales by internet retailers grew, the states sought ways to recover what
they saw as lost revenue. Every state that has a sales tax also has a use
tax, which compells the buyer to pay the taxes due on purchases they made
out of state. That means the revenue is not really lost, but for the most
part is never collected. Why? Because the use tax depends on one thing,
that the buyer voluntarily acknowledge the purchase and file the necessary
paperwork along with the tax remittance. In such a scenerio, the state has
very little ability to enforce the use tax outside of purchases that must be
registered in the state like a car, boat or RV, or a large commercial purchase
that leaves a paper trail such as a registered contract or lien filing.

The next step the states took was to expand the definition of what it means
to be a business entity in a state. Certainly a company opening its doors
in a state required that the company register with the state and follow the
laws in that state as regards the collection and remittance of sales taxes.
For large retailers like WalMart and Target, there was no doubt where they
had stores and were registered as a business in the state. Regardless, when
it came to internet sales ordered through a server in one state, shipped from
a warehouse in another state, and delivered by the post office, UPS, or FedEx
to the customer in yet another state, questions still remained.

New laws and legal challenges continued to mount. The term "nexus" began
to be incorporated into state sales tax laws. A nexus applied to any person
or company that had any physical presence in the state such as a store, a
warehouse, an office, or a personal representative. If a nexus could be
established, then the state felt they had a legal standing with which to
compell the selling party to comply with the tax laws and be responsible for
the collection and remittance of taxes on all sales delivered anywhere in
the state.

Other laws were enacted that were directed to larger organizations. These
laws mandated retailers of high volume sales to comply with state laws whether
there was a nexus or not. Though there was no standing precedent for such
laws, with the dollars involved, it forced these ones to comply or risk long,
protracted, and expensive legal battles, which could easily outweigh the
cost of compliance. Rather than loosing access to large markets such as
New York, California, or Texas, most chose to comply, but doing so with
much reluctance.

That briefly brings us down to today's decision in South Dakota v. Wayfair.
Although the law in South Dakota is also directed at larger organizations,
it comes from one of the smallest markets in the U.S. As such, it is a
game changer. To see how, please continue with the next post,
2018-06-21 SCOTUS - SD v. Wayfair - The Ruling.